Thanks to Dent Research on November 6, 2015, here we have our weekly information roundup ending the week. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you. If you are confused, you have a lot of company! Bloomberg reported 2015 that third-quarter earnings have fallen the most since Q3 of 2009 and were negative for the second straight quarter. You'd think the stock market ought to decline on such bad news. Instead, it’s near all-time highs. Fortunately we are working hard to cut through the noise and find ways to make sense.
The U.S. Economy Created 271,000 Jobs in October… The report marked a dramatic reversal from the slowdown in September. The
unemployment rate remained mostly unchanged at 5.0%
What it means – Last month’s surprise drop to 142,000 (which was revised a bit lower to 138,000) caught the world off guard. It removed any question as to what the Fed would do in October, and sent equity markets shooting higher. Now we have a report that’s well above the rough average of 225,000 this year, which should send equities lower in anticipation of a Fed rate hike. We’ll see.
The report was surprisingly positive, and even included a 0.4% bump in hourly earnings. But unit labor costs, which includes pay and benefits, are up a mere 2% for the year. The presumption is that with more people working, wages must go up, which drives inflation. Only it hasn’t worked out that way. Unemployment keeps falling, and yet wages are flat. This vexes the Fed governors, who want some sign of higher income so they have cover for raising rates.
And of course, our old friend the birth/death adjustment showed up again in October. Of the 271,000 jobs created, the Bureau of Labor Statistics guessed 165,000.
Institute of Supply Managers (ISM) Manufacturing Index Drops to 50.1 in October… The reading follows successively lower numbers in August and September, and is the lowest report since the spring of 2013.
What it means – We’ve not reported ISM or PMI numbers in some time. They’ve hovered just above breakeven (50) and haven’t been informative. The current slide of ISM Manufacturing might be different. New orders are growing modestly, but backlogs, employment, and exports are all contracting. The report gels with other indicators and points to weakness ahead, not growth.
Atlanta Fed’s GDPNow Model Estimates Fourth-Quarter Growth at 1.9%... The updated estimate includes the disappointing data from the Manufacturing ISM report, and is 0.6% lower than the previous forecast
What it means – Added to GDP growth so far this year, if the GDPNow estimate is correct then our full-year growth will be just under 1.9%. We’ve seen this movie before. In fact, we’ve seen it several times. This year is shaping up as a replay of every year since 2010. Federal officials and private institutions estimate a liftoff in economic growth at the beginning of the year, only to be foiled by reality as time wears on.
Expect more of the same when the calendar turns to 2016. We'll see lots of sunny forecasts that call for inflation, higher interest rates, rising wages, etc., only to be dialed back as time goes on.
Federal Reserve Chair Janet Yellen Notes that a December Rate Hike is Possible… During Congressional testimony, Chair Yellen stated that a rate hike next month is a live possibility, but then she also noted the possibility of negative rates if economic growth disappoints.
What it means – Same story, different day. The most powerful monetary regulatory body on the face of the planet is unsure of what to do 45 days from now, and is waiting for the last few data points before making a decision. They could raise rates, hold steady, or even lower rates. All we can do is wait and see.
Chinese Non-Performing Loans Officially at 1.82%, Could Be as High as 20%… A Hong Kong research group reviewed shadow loans in addition to official bank loans and found widespread efforts to hide non-performing assets.
What it means – The game is on. Instead of letting loans default, bankers move them around, extend terms, push them off their balance sheets, and generally do whatever they can to keep them afloat. Japan did the same thing in the early 1990s. That country kept up pushing out the pain for years until they finally dealt with their accounting issues in the early 2000s.
China could do the same thing. Instead of overseeing a credit implosion, the Chinese government could use its wealth and power to spread the damage over time. But that doesn’t reduce the damage. It might even make it worse. Japan’s economy still suffers from more than two decades of deflation. If Chinese officials don’t get rid of the dead weight in their banking system, it could hold back economic growth for many years to come.
Chinese Government Estimates Economic Growth at 6.5%... One outcome of their five-year planning session was a downgrade of economic growth from 7% to 6.5%.
What it means – Slowing economic growth in China isn’t news. What makes this interesting is that the government is OK with it, which implies they won’t take aggressive fiscal or monetary action to keep growth near 7%. It also means the yuan could be under more pressure in the months ahead.
As capital controls ease, look for more cash to leave China, driving the government to sell more of its foreign currency reserve, which is exactly what Harry Dent has been writing about.
Next Week – The week of November 9 brings reports on Chinese inflation and industrial production, as well as GDP and industrial production in the euro zone. There are few reports in the U.S., where banks are closed on Wednesday.
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